Spinning and Underpricing: A Legal and Economic Analysis of the Preferential Allocation of Shares in Initial Public Offerings

Abstract

Among the sullied practices to emerge from the bursting of the stock market bubble is the preferential allocation, or "spinning," of shares in initial public offerings. This Article analyzes the practice of spinning, seeking first to understand it from the perspective of financial economics and, on the basis of that understanding, to determine the proper legal treatment of spinning. Through an analysis of the offering process and the incentives of its participants, the Article locates the primary harm of spinning in the underpricing of initial public offerings. Finally, the Article evaluates the various legal and regulatory proposals aimed at spinning to determine which among them is most likely to address this distinctive harm.

Keywords: spinning, underpricing, ipo, initial public offering, securities law, issue, issuer, underwriter, conflict of interest, duty of loyalty

JEL Classification: G3, G30, G34, G39